United States: Further Guidance On The ACA's Cadillac Tax

The Affordable Care Act (ACA) added Code Section 4980I to the Internal Revenue Code. Effective for tax years beginning on or after January 1, 2018, an excise tax of 40 percent will be imposed on the cost of employer-sponsored health coverage that exceeds an annual limit. This tax is informally known as the "Cadillac Tax" and will impose a penalty on employers, health insurers and "persons who administer plan benefits" with regard to high-cost health care coverage.

On July 30, 2015, the Internal Revenue Service (IRS) issued guidance on the Cadillac Tax in Notice 2015-52, supplementing Notice 2015-16, which was released on February 23, 2015.

In Notice 2015-52, the IRS addresses the following issues:

  • Who must pay the Cadillac Tax
  • How employers are aggregated
  • How the tax is calculated
  • How the tax is paid

Who Must Pay the Cadillac Tax?

The Code defines the "coverage provider" as the taxpayer liable for paying the Cadillac Tax. For purposes of an insured group health plan, the coverage provider is the health insurance issuer. For purposes of a Health Savings Account (HSA) or an Archer medical savings account (MSA), the coverage provider is the employer. For all other types of applicable coverage, the coverage provider is defined as "the person who administers the plan benefits." The term "person who administers the plan benefits" is not used elsewhere in the Code or the ACA. As a result, the IRS is considering two approaches to defining this term. Notice 2015-52 outlines these approaches.

First Approach

Under the first approach, the "person who administers the plan benefits" would be the person responsible for performing the day-to-day functions that constitute the administration of plan benefits, such as receiving and processing claims for benefits, responding to inquiries or providing a technology platform for benefits information. The IRS anticipates that this person generally would be a third-party administrator for self-insured benefits.

Second Approach

Under the second approach, the "person who administers the plan benefits" would be the person who has the ultimate authority or responsibility under the plan or arrangement with respect to the administration of the plan benefits. The IRS anticipates that this person would be identified in the applicable plan documents and would not likely be the person who performs the routine administrative functions of the plan. This would likely be the "Plan Administrator" or its delegate for ERISA-covered plans.

How Are Employers Aggregated for Purposes of the Cadillac Tax?

Employers aggregated under the Internal Revenue Code's controlled group and affiliated service group rules—Code Section 414(b), (c), (m) or (o)—are treated as a single employer for purposes of the Cadillac Tax. In addition, there is a special rule for multi-employer plans. The plan sponsor of a multi-employer plan (as defined in Section 414(f)) is responsible for making the calculations and for providing the notice.

The IRS requests comments on the application of these aggregation rules to the following:

  • Identification of the applicable coverage taken into account as made available by an employer
  • Identification of the employees taken into account for the age and gender adjustment, and the adjustment for employees in high-risk professions and employees who repair and install electrical or telecommunication lines
  • Identification of the taxpayer responsible for calculating and reporting the excess benefit
  • Identification of the employer liable for any penalty for failure to properly calculate the Cadillac Tax

Additional Issues in Calculating the Cadillac Tax

Taxable Period

The Cadillac Tax imposes a 40 percent penalty on any "excess benefit" provided to an employee for any taxable period. An "excess benefit" is defined as the excess of the aggregate cost of applicable coverage over the annual applicable dollar limit for an employee. The applicable dollar limit for high-cost plans is currently $10,200 for individual coverage and $27,500 for family coverage. These dollar limits will be updated for 2018 when final regulations are issued and thereafter indexed for inflation in future years. The IRS anticipates that the "taxable period" will be the calendar year for all taxpayers; however, the regulations provide that the "taxable period" can be a shorter period as prescribed by the Secretary, and permit the Secretary to prescribe different taxable periods for employers of varying sizes.

In order to determine the amount of tax owed for a taxable period, the employer must determine the extent any applicable coverage exceeded the dollar limit in a given month. The employer then must notify both the IRS and the coverage provider, and the coverage provider then must pay the tax. As a result, employers will need to determine the amount of tax soon after the close of the taxable year so that coverage providers may pay the tax in a reasonably timely manner.

The IRS anticipates a host of timing issues to arise for different fully insured and self-insured plan structures, and requests comments on any such issues.

Calculating the Cost

The cost of the applicable coverage is to be determined using rules "similar to the rules of section 4980B(f)(4)" regarding the determination of the COBRA applicable premium. The IRS has invited comments on potential approaches to determine the cost of applicable coverage. The U.S. Department of the Treasury and the IRS also have asked for comments on any issues raised by the anticipated need to determine the cost of applicable coverage for a taxable period reasonably soon after the end of that taxable period.

Cost of Coverage Transferred to Employer

While the coverage provider will pay the Cadillac Tax for fully insured coverage, the IRS anticipates that the cost of the tax will be passed through to the employer. Additionally, because the Cadillac Tax is not deductible, any reimbursement received by the coverage provider from the employer will be additional taxable income to the coverage provider. As a result, it is likely that a coverage provider will pass along both the Cadillac Tax reimbursement and the additional income tax (the "income tax reimbursement") to the employer. While the Cadillac Tax reimbursement will be excluded for purposes of determining the cost of applicable coverage, the Code is not clear on whether to recognize the income tax reimbursement. The IRS is still considering whether this reimbursement should be excluded as well. However, Treasury and IRS are concerned that a methodology for excluding an income tax reimbursement may not be administrable, given the potential variability of tax rates and other factors among different coverage providers, as well as potential difficulties in determining and excluding the reimbursement amount. Nonetheless, comments are requested on administrable methods for exclusion of the income tax reimbursement.

Contributions to HSAs, Archer MSAs, FSAs and HRAs

Account-based plans, such as HSAs, Archer MSAs, Flexible Spending Accounts (FSAs) and Health Reimbursement Arrangements (HRAs), pose a unique problem because contributions to such accounts may be difficult to track. The IRS is considering an approach under which contributions to account-based plans would be allocated on a pro rata basis over the period to which the contribution relates (generally the plan year), regardless of the timing of the contributions.

Experience-Rated Arrangements

In addition to the above, experience-rated arrangements provide some dilemmas for the IRS. In an experience-rated scenario, the insurer may provide payments to the policyholder after the end of a coverage period. These payments relate to the coverage provided during that coverage period. In other instances, the equivalent of those types of payments may be made through a premium discount or premium holiday for the next coverage period. The IRS is requesting comments on how those payments or discounts may be reflected in the cost of applicable coverage, including comments on any administrative issues that might arise if, for purposes of determining the cost of applicable coverage, the payments or discounts are attributed back to the original period of coverage (for which the taxable year might have ended) rather than accounted for during the period of coverage in which the amounts are paid or the discount applied. In addition, comments are requested on how employers are addressing these payments or discounts currently for purposes of determining their plan's COBRA applicable premiums.

FSAs with Employer Flex Credits

FSAs also pose a problem because employees may often carry forward salary reduction amounts from one year to the next. To avoid double counting, the IRS is considering providing a safe harbor by which the cost of an employee's salary reduction would be included in the cost of applicable coverage for that year, regardless of whether any amount was carried to the next year.

Age and Gender Adjustment to the Dollar Limit

As described previously, the dollar limit that determines the onset of the Cadillac Tax for 2018 is $10,200 for self-only coverage and $27,500 for anything other than self-only coverage. However, these limits may be increased based on the age and gender characteristics of a particular workforce. The IRS is considering using the Current Population Survey (Table A-8a), Employed Persons and Employment-Population Ratios by Age and Sex, Seasonally Adjusted (Table A-8a), published annually by the U.S. Department of Labor Bureau of Labor Statistics.

In order to determine the age and gender characteristics of an employer's population, the IRS is considering requiring an employer to determine the age and gender of each employee as of the first day of the plan year for purposes of determining the population for the entirety of the year.

Notice and Payment of the Tax

In addition to calculating the tax, employers must notify the IRS and each coverage provider of the amount. The IRS is considering the form and deadline of this notice. The IRS is also considering how calculation errors may affect both notice and payment of the tax.

Request for Comments

The IRS invites comments on all of the issues addressed in Notice 2015-52. Comments should be submitted to the IRS no later than October 1, 2015.

Further Guidance On The ACA's Cadillac Tax

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
McGuireWoods LLP
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
McGuireWoods LLP
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions